Behavioural economics literature mentions over 100 cognitive biases. The list below includes some of the most researched biases. Some of the examples come from Dan Ariely’s book Predictably Irrational, others from websites that focus on economics and the psychology of decision-making under uncertainty. 1. Risk aversion Imagine you were given the choice between two scenarios, one with guaranteed payoff, and one without: in the first scenario you receive US$50; in the second scenario a coin is flipped to decide whether you receive US$100 or nothing. Which one would you choose? Most people would choose the guaranteed US$50, though according to classical economic theory we should be indifferent between these two scenarios. Moreover, most people would also prefer a guaranteed US$49 to the 50% …show more content…
Loss aversion Economic decisions that involve loss are considered quite differently from economic decisions that involve gain. Indeed, studies have shown that people tend to give potential losses greater weight than potential gains. Simply changing the way in which decisions are presented – as gains, or as losses – changes decision-making behavior. We all start out with US$50. In the first scenario, we are given two options: 1) keep US$20, or 2) gamble with a 1/3 chance of keeping US$50 and 2/3 chance of keeping nothing. (Here most people choose to keep the US$20, as it was framed as possible loss.) In the second scenario, we are given two options: 1) lose US$30, or 2) gamble with a 1/3 chance of keeping all US$50 and 2/3 chance of losing it. (Here most people choose to gamble, as the US$30 was framed as loss.) 3. Framing Context counts! Studies have shown disparities in estimates when identical problems are presented in different ways. For example, people would rather buy potato chips labeled 75% fat free than identical potato chips labeled 25% fat. Obviously the content of fat in both is the same, but presenting it as 75% fat-free seems to be much more appealing to